Put Option

A contract that gives the holder the right to sell a specified number of shares (usually 100) of a particular stock, stock index or dollar face value of bonds, at a predetermined price–called the “strike price”–on or before the option’s expiration date. For this right, the holder (buyer) pays the writer (seller) a premium. The holder profits from the contract if the stock’s price drops. If the holder decides to exercise the option (as opposed to selling it), the writer must buy the security. The writer profits when the underlying security’s price remains the same, rises or drops by less than the premium received.

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